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Relative Performance Total Return Swaps for Spread and Asset Allocation

Article Quant Q&A · Author: Parting
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Summary

The document describes a relative performance total return swap as a position combining two partly offsetting swap legs. In a bond example, an investor sells a total return swap on a safer bond and buys one on a riskier bond with a similar maturity. The bond legs can largely offset interest-rate exposure, leaving the investor to receive the difference in coupon payments, which roughly reflects the credit spread if neither bond defaults.

A second example uses swap positions on different equity indices to alter regional exposure. The answer notes that both legs may face the same counterparty and compares the structure with a contract for difference, while distinguishing it by its intermediate cash flows. It does not establish precise definitions for “Performance Fixed” and “Performance Float” TRS; the responder only guesses these may refer to fixed- versus floating-coupon bonds. The examples are illustrative, with no detailed valuation, documentation, or risk analysis.

Key ideas

  • A relative performance TRS can combine two partly offsetting total return swap legs.
  • Similar-maturity bond legs may reduce interest-rate exposure while retaining a credit-spread exposure.
  • Equity index TRS legs can be used to change regional market exposure.
  • TRSs can have intermediate cash flows, and both legs may face the same counterparty.
  • The document does not define fixed and floating performance TRS terminology precisely.

Tags

Derivatives pricingFixed incomeEquitiesRisk management
Full text
# What is the Performance Total Return Swap (TRS)? How about Performance Fixed TRS and Performance Float TRS?


# What is the Performance Total Return Swap (TRS)? How about Performance Fixed TRS and Performance Float TRS?












I just know these products recently: Performance Total Return Swap (TRS), Performance Fixed TRS and Performance Float TRS.

But cannot find a detailed explanation of the product, all I can find is an introduction about performance swap: https://www.investment-and-finance.net/derivatives/p/performance-swap.html and the introduction of total return swap: https://www.investopedia.com/terms/t/totalreturnswap.asp

While I am confused about how these to combine into one product? And why do people use them?

Any books/references would be highly appreciated! Thanks for your help!

## Answer by Dimitri Vulis (score 2, accepted)

https://quant.stackexchange.com/a/70219

A "relative performance TRS" is a combination of two partly offsetting TRSs, for example Alice sells a TRS on a credit risk-tree or less risky bond, Alice buys a TRS on a riskier bond of similar maturity (which has lower price or pays more coupon), and Alice collects the difference in coupon payments (approximately the credit spread, the difference of bonds' yields) (unless some bond defaults). If both bonds pay fixed coupon, then the two legs mostly cancel the interest rate risk. I don't recal the expressions "Performance Fixed TRS and Performance Float TRS", but I would guess it has to do with bonds paying fixed or floating coupon.

Another example, Alice has USD 3 billion in US equities. To diversify, Alice sells 2 billion TRS on S&P 500, and buys 1 billion TRS on CAC40 and 1 billion TRS on DAX.

For simplicity, Alice probably faces the same counterparty Bob on both legs.

It's similar to contract for difference (CFD), but you have intermediate cash flows, rather than just one at the end.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.